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London Offices Are Riding the Global Cycle

Last week, CBRE Research reported that Q3 2017 take-up (gross absorption) in Central London was 3.4 million square feet. This is an increase of 3% on the previous quarter and 10% above the 10-year average.

Also last week, Lloyd Blankfein, CEO and Chairman of Goldman Sachs, tweeted: “Just left Frankfurt. Great meetings, great weather, really enjoyed it. Good, because I'll be spending a lot more time there. #Brexit.”

So, what’s going on with London office take-up?

As Figure 1 shows, take-up over the last ten years has been volatile, with downturns around the time of the Great Financial Crisis (2008 to Q4 2010), the Eurozone Crisis (Q2 2011 to Q2 2013) and the Brexit vote (Q3 2016).

The U.K. is leaving the E.U. according to a fixed two-year timetable, and seems a long way from agreeing to the terms of its departure—or even the medium-term transitional arrangements. Economic growth in the U.K. has so far surprised on the upside, but it is slowing now, and various banks have suggested that they will have to relocate activity from London. However, all of this, including the political uncertainty, should not blind us to an increasing positive global economic story.

The recent uptick in take-up is due to three factors.

First, world trade has picked up strongly in the last nine months and is now growing by more than 5% year-on-year, its highest rate for over five years. This is good news for London. More than just a global banking and finance hub, London also services world trade through insurance, currency and derivatives products as well as legal, accounting and business services. Higher growth generates higher demand for these services.

Second, growth in London’s most important market, the Eurozone, is also strong. Annualized growth in the Eurozone was 2.4% in Q2 2017, and this level of momentum seems set to continue, with manufacturing and services sector confidence indicators at a three-year, and near cyclical, high. The U.K. may be on its way out of the E.U.—with its future trading arrangements uncertain—but it is not there yet, and the recent fall in the value of sterling has made London-based service providers (and manufacturers) very competitive in that marketplace.

Third, the stock market is buoyant. This factor is often overlooked as a driver of London office demand. Profits in financial services firms are often directly linked to the value of stocks, through levels of equity issuance, issuance derivatives contracts and performance fees from fund management operations. Profits generate hiring activity. So, growth in the value of the stock market creates positive feedback for real estate markets. Figure 2 shows the close relationship in London between stock market growth and take-up. The same relationship can be seen in other global financial centers.

Detailed analysis of both the quarterly and six-monthly take-up trends confirms this analysis. The finance sector has expanded most strongly at 117% in Q3 and 189% on a six-month on six-month basis. Business services was weaker over the quarter (down 26%) but up 102% on a six-month on six-month basis. Professional services was up 30% quarterly and six-monthly.

London office demand looks in good shape as global growth accelerates.

The risks from Brexit cannot ignored, but it is in the interest of both the U.K. and the E.U. to arrive at a workable deal, and that is most likely to happen. However, during this period, global growth looks set to remain strong for at least the next 12 months, and that will drive trade growth. The Eurozone still has plenty of capacity to expand without generating inflation—and looks likely to do so. Furthermore, the performance of the FTSE over the last two years gives the London market quite a bit of near-term momentum.